Italy turmoil drags European markets down

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A worsening political crisis in Italy provoked a second day of selling on European markets, with the euro cut to an 11-month low, stocks punished and short-term borrowing costs surging for the government in Rome.
The euro dropped against the dollar after earlier positivity gave way to fear of a drawn-out crisis. PHOTO: AFP

PARIS (AFP) - European stocks, bonds and the euro fell on Monday (May 28) as political chaos in Italy rattled investors who feared the nomination of a caretaker government will only delay, but not avert, a eurozone crisis, analysts said.

Oil prices extended losses, meanwhile, after Saudi Arabia and Russia signalled they could raise output, while Asian stock markets rose on signs that Donald Trump's summit with Kim Jong Un could be back on.

Milan's FTSE MIB stock index had a rollercoaster day, starting with a two-percent surge as investors greeted with relief President Sergio Mattarella's veto against the nomination of fierce eurosceptic Paolo Savona as economy minister.

But a growing feeling that Italian politics are far from out of the woods quickly caused a Milan stock market downturn, also sparking a reversal in Paris and Frankfurt, as well as weakness in the euro.

Italy is mired in political chaos after the anti-establishment Five Star Movement and the far-right League's bid to form a government collapsed.

Spread widens

The Italian president has now appointed Carlo Cottarelli, a pro-austerity economist formerly with the International Monetary Fund, to lead a technocrat government, ahead of likely fresh elections in the autumn.

Italy's debt-risk premium rose as the yield on the government's 10-year bonds - the return an investor gets on holding the bond - spiked to 235 points above that of German debt which is the eurozone's benchmark, its highest level in over four years.

This was 29 basis points more than late Friday.

Yields typically rise at times of stress as investors demand higher returns if they are to buy a country's bonds.

Meanwhile the euro also dropped against the dollar after earlier positivity gave way to fear of a drawn-out crisis.

"The planned eurosceptic governing coalition will not initially be possible. However, it looks like there will be new elections in the autumn, which could see the populists emerge with a bigger share of the votes," Commerzbank Commodity Research analysts said in a note.

The single currency was also hurt by the prospect of upheaval in Spain, where Prime Minister Mariano Rajoy faces a no-confidence vote after his party was found guilty of benefiting from illegal funds in a massive graft trial.

Oil slips

WTI oil futures contract tanked Monday, extending last week's losses, after Saudi oil minister Khaled al-Faleh said his country could open the taps wider in the second half of the year to insure against any supply shocks.

His Russian counterpart Alexander Novak said they discussed whether they need to ease production limits set in 2016.

The comments come as supply worries increase, with major producer Venezuela hit by economic uncertainty, Iran facing painful export sanctions and demand seen picking up.

Asian markets meanwhile mostly rose on renewed hopes for a Trump-Kim summit after the US president appeared Friday to make a U-turn 24 hours after cancelling the meeting.

On Sunday Trump tweeted that a US team "has arrived in North Korea to make arrangements for the summit".

He added: "I truly believe North Korea has brilliant potential and will be a great economic and financial Nation one day. Kim Jong Un agrees with me on this. It will happen!"

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